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Eurofound's EU PolicyWatch collates information on the responses of government and social partners to the COVID-19 crisis, the war in Ukraine, rising inflation, as well as gathering examples of company practices aimed at mitigating the social and economic impacts.

Factsheet for measure AT-2023-1/2894 – measures in Austria

Tax reform to abolish the "cold progression" and adjustment of social benefits to inflation

Abschaffung der "kalten Progression" und Valorisierung der Sozialleistungen

Country Austria , applies nationwide
Time period Open ended, started on 01 January 2023
Context War in Ukraine
Type Legislations or other statutory regulations
Category Responses to inflation
– Increasing income in general
Author Bernadette Allinger (Forba) and Eurofound
Measure added 15 September 2022 (updated 20 September 2022)

Background information

In Austria, the income tax rates are progressive, meaning that the income is broken in several brackets and taxed at tax rates that increase according to tariff levels. When nominal wages increase annually (e.g. by collective bargaining outcomes), but the tariff levels remain at the same thresholds, employees continually move up to higher tariff levels; thus, their tax assessment basis increases, without the tax rate being adjusted accordingly, which means that the tax burden increases disproportionately. This effect of annual wage increases leading to an additional tax burden is called "cold progression".

In order to avoid such a "cold progression", the tariff levels would have to be adjusted annually for inflation.

Content of measure

In the face of the energy crisis and increasing prices, the national government has agreed in the Council of Ministers in September 2022 to adjust tariff levels for the inflation from 1 January 2023 onwards, thus relieving employees from increasing taxes.

The thresholds for the two lowest tariff levels (up to €11,000 at 0% and up to €18,000 at 20% tax) are to be raised above the level of the inflation rate (which has been defined as 6.3%, from July 2021 to June 2022). Thus, the lowest tax level is increased to €11,693 and the second lowest level to €19,134. As a result, low and middle incomes will be particularly relieved. The threshold amounts of the other tariff levels are increased by two-thirds of the inflation rate, corresponding to an adjustment of 3.47% and thus also relieves people with middle and higher incomes.

It is expected that by 2026, tax payers will save an estimated total of more than €20 billion. Two thirds of the revenue from this cold progression automatically flows back to the taxpayer via income tax and tax credits. The remaining third of the income for the coming year comprises around €600 million, which will primarily benefit small and medium-sized income earners.

In addition, the federal government has agreed to correct social benefits for inflation (at the amount of two thirds of the inflation).

From 1 January 2023, single-earner, single-parent and maintenance tax credits, pensioner tax credits and transport tax credits will be automatically adjusted to inflation (by two-thirds). Social and family benefits (including sickness, rehabilitation, retraining allowances, study grants, family allowances, multiple child supplements and child tax credits) will also be adjusted in line with the annual automatic valorisation.

Use of measure

This will benefit virtually all persons living in Austria and paying income tax or receiving benefits.

Target groups

Workers Businesses Citizens
Applies to all workers Does not apply to businesses Parents
Pensioners
Students
People on social benefits
People on low incomes

Actors and funding

Actors Funding
National government
National funds

Social partners

Social partners' role in designing the measure and form of involvement:

Trade unions Employers' organisations
Role No involvement as case not in social partner domain No involvement as case not in social partner domain
Form Not applicable Not applicable

Social partners' role in the implementation, monitoring and assessment phase:

  • No involvement
  • Main level of involvement: N/A

Involvement

No involvement.

Views and reactions

The labour side (Federal Chamber of Labour AK and Austrian Trade Union Federation ÖGB) have been calling for the abolition of cold progression for years and thus welcome this step. Also the indexation of social benefits is welcomed in principle. However, organised labour would have demanded that unemployment benefits and emergency assistance would also be adjusted.

The General Secretary of the Federal Economic Chamber (WKO) has stated that the cold progression would "bring relief on a broad basis [...and...] will set in motion a structural change in the tax system that has come to stay." He also noted that this effect should be taken into account for the upcoming collective bargaining rounds: "In view of the high inflation, the abolition of the cold progression will have an income-securing effect and thus have positive effects on wages and salaries in Austria."

Sources

Citation

Eurofound (2022), Tax reform to abolish the "cold progression" and adjustment of social benefits to inflation, measure AT-2023-1/2894 (measures in Austria), EU PolicyWatch, Dublin, https://static.eurofound.europa.eu/covid19db/cases/AT-2023-1_2894.html

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Disclaimer: This information has not been subject to the full Eurofound evaluation, editorial and publication process.